Snakes and Ladders: Stimulus packages and debt savings as house prices soar
A curious thing happened in the days leading up to the 2021 budget. Data released by property analysis firm CoreLogic indicated that Australian residential housing values had exceeded $ 8 trillion. It’s an eight with 12 zeros after it.
Take the total value of Australian GDP. Add the Australian Securities Exchange (ASX) market cap, then include the Australian pension system total sum. You would still be about a trillion dollars less than the value of Australian residential property.
The Australian real estate market is not only outpacing the productive economy, it is simply eclipsing it. There does not appear to be any political will or will to address this growing imbalance. Quite the contrary, it seems.
According to CoreLogic, the median Australian home price hit $ 655,557 in April. After a brief Covid-induced respite in 2020, the market roared back, experiencing its highest monthly rate of capital growth in 32 years in March.
Real estate investors, who stayed on the sidelines last year, are back in the game. In the past six months, home sales are 19% above their decade average, with median home selling time at an all time high.
The fading Australian dream
Nowhere is the high cost of housing more acute than in the country’s two largest cities.
The median house price in Sydney has risen 13.4% in the past six months alone, now standing at $ 1,147,352. Melbourne is up 9% in the past six months, to $ 869,676. The two cities are now part of the world’s least affordable housing markets.
A 2018 study of long-term house price growth, featuring Australia and 10 other developed economies by UK economists Elroy Dimson, Paul Marsh and Mike Staunton, found that real house prices in Australia had by far the highest growth during the period 1900 to 2017. Their work showed that real house prices in Australia rose almost three times the peer average during this period and 65% more than the second most expensive market (UK). Interestingly, the gap has widened considerably over the past 20 years.
This is a view shared by the Economic Development Committee of Australia (CEDA), which in its broad Housing Australia report noted that “Those who were not fortunate enough to have bought their first home in the mid-90s are finding it increasingly difficult to break into the property market”. The report also highlighted a range of policy measures, including negative gearing and changes in capital gains tax, contributing to the problem.
Soaring prices would not be such a concern if real incomes increased with the cost of housing. Search by Grattan Institute, however, reveals that while average full-time real earnings have largely doubled since 1970, real house prices have almost quadrupled, making this first foothold on the real estate ladder increasingly tenuous and level. Debt subsequently heavier and heavier according to our experts.
Budgetary measures to tackle unaffordability
This year’s budget contained a number of policy measures targeting housing, none of which are likely to move the lines on affordability.
Many are mere extensions or changes to the demand-side housing affordability measures introduced in the 2017-2018 budget, such as an increase in the amount that can be withdrawn from voluntary employee pension contributions, via the First Home Super Saver Scheme, from $ 30,000 to $ 50,000. Or the reduction of the eligible age from 65 to 60 for those who wish to sell the family home and pay part of the proceeds into a retirement pension via a workforce reduction contribution.
Then there’s the New Home Guarantee, a rebranding of the First Home Loan Deposit Scheme, which will allow up to 10,000 eligible participants each year to apply for a home loan with as little as a 5% deposit, through a mechanism which effectively provides a guarantee to the lending financial institution of up to 15% of the value of the property. What bank would not jump at the opportunity to lend to an otherwise marginal borrower if the taxpayer provides a large reserve of equity in the event of default?
A more targeted version, called the Family Home Guarantee, will help up to 2,500 eligible single parents each year buy a property with a down payment of just 2%. Compared to some 480,000 low- and very low-income households with unaffordable rents, this measure seems woefully insufficient.
And finally, there is an extension and a new modification of the Builder scheme. This has been an absolute boon for the home construction industry, with the initial estimate of $ 688 million in taxpayer funding. is now expected to exceed $ 2.5 billion, as the government continues to divert a significant amount of taxpayer money to the sector.
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Bet on bricks and mortar
Home prices don’t go up in a vacuum. In addition to accommodative political parameters, financial kerosene must be ubiquitous to maintain an upward trajectory.
Despite a global pandemic that has brought parts of the Australian economy to their knees, housing finance has instead exploded. While first-time buyers and homeowners have had less competition from investors last year, the latest housing finance data from the Australian Bureau of Statistics suggests new loan growth is now at all-time highs .
Source: ABS – Loan indicators (March 2021)
Remarkably, while new loan commitments to first-time homebuyers rose 61.4 percent in March 2021 from a year earlier, the corresponding figure for residential construction rose 123.6 percent, according to the Bureau. Australian statistics.
In short, that $ 30 billion worth of construction in the HomeBuilder pipeline is a boon for both the home construction industry and the banks.
With the demand for housing finance skyrocketing, it’s no surprise that banks are also supportive of the government’s attempt to cancel responsible lending obligations legislation, ignoring the recommendation of the Hayne Royal Commission that RLO laws be both maintained and appropriately regulated to limit harm to consumers.
Cheaper loan obligations, mortgage rates at historic lows and government programs stoking the flames of the real estate market would be an intoxicating combination indeed in the age of bankers’ bonuses.
Feed the beast of property
According to the Australian Housing and Urban Research Institute, the rate at which tenants become homeowners has been steadily declining, from 14% in the early 2000s to 10% more recently.
The decline, AHURI notes, is more pronounced for younger age groups and low-income households.
However, it is not in the government’s interest to upset the country’s more than 5 million owner households or the owners of the country’s roughly 2 million residential investment properties, compared to the roughly 120,000 Australians who manage to rush up the property ladder every year.
However, the burden is not only borne by tenants seeking an entry point into homeownership. The ramifications of bigger and longer mortgages started later in life will spill over into the economy for decades, with AHURI finding that real mortgage debt of people aged 55 and over has increased by more than 600% between 1987 and 2015.
Approaching retirement with significant unpaid mortgage debt may become a feature, not a bug, of future retirement.
For now, however, the game of snakes and ladders of ownership continues regardless. There are simply too many issues with too many vested interests for him not to do it.